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C&

Core & Main, Inc. (CNM)·Q3 2023 Earnings Summary

Executive Summary

  • Q3 2023 delivered stable topline with net sales up 0.5% to $1.83B, while gross margin compressed 50 bps to 27.0% and Adjusted EBITDA fell 5.5% to $260M; diluted EPS was $0.65, flat year over year .
  • Management raised full-year FY2023 Adjusted EBITDA guidance to $890–$910M and operating cash flow conversion to 110–115% of Adjusted EBITDA, citing stronger margin initiatives and inventory optimization .
  • Municipal demand remained resilient; residential lot development improved sequentially, while nonresidential volumes stabilized late in the quarter, with softness in multifamily and warehouse offset by strength in highways and street projects .
  • Capital deployment accelerated: $770M spent year-to-date on share repurchases retiring 30M shares; net debt leverage fell to ~1.5x, supporting optionality for M&A and future dividends .

What Went Well and What Went Wrong

  • What Went Well

    • Strong cash generation: operating cash flow of $373M in Q3, ~140% conversion of Adjusted EBITDA, aided by inventory optimization .
    • Margin initiatives and sourcing optimization outperformed expectations, partly offsetting gross margin normalization; accretive M&A contributed to mix and margins .
    • Meter product line strength as supply chains eased and AMI adoption accelerated; backlog converted to shipments, with robust bidding activity .
    • Quote: “We have delivered nearly $1.1 billion of operating cash flow over the last 4 quarters… providing capacity to reinvest in organic growth, pursue strategic M&A and return capital to shareholders.” .

  • What Went Wrong

    • Gross margin normalization continued as older low-cost inventory caught up to current prices, driving a 50 bps YoY GM reduction and 90 bps EBITDA margin decline .
    • Nonresidential softness in multifamily and warehousing pressured volumes; SG&A grew 4% YoY on inflation and acquisitions, lifting SG&A rate to 13.1% .
    • IIJA funding flows slower than anticipated; only “green shoots” in a handful of Upper Midwest states so far, pushing municipal tailwind timing into 2024 .

Financial Results

MetricQ3 2022Q2 2023Q3 2023
Net Sales ($USD Millions)$1,818 $1,861 $1,827
Gross Profit ($USD Millions)$500 $501 $494
Gross Margin %27.5% 26.9% 27.0%
Net Income ($USD Millions)$178 $164 $158
Diluted EPS ($USD)$0.65 $0.66 $0.65
Adjusted EBITDA ($USD Millions)$275 $270 $260
Adjusted EBITDA Margin %15.1% 14.5% 14.2%
SG&A as % of Sales12.7% 12.8% 13.1%

Segment/Product Commentary (no quantitative disclosure):

  • Pipes, Valves & Fittings: Declined on lower end-market volumes, partially offset by acquisitions .
  • Storm Drainage: Growth from higher volumes tied to acquisitions .
  • Fire Protection: Declined on lower steel pipe prices/volume .
  • Meter Products: Growth from acquisitions and AMI adoption .

KPIs

KPIQ3 2023
Operating Cash Flow ($USD Millions)$373
Net Debt Leverage (x)1.5x
Available Liquidity ($USD Billions)>$1.3
Inventory YoY ChangeDown ~$325M (~28%)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net SalesFY 2023$6.6B–$6.8B $6.65B–$6.75B Maintained/narrowed
Adjusted EBITDAFY 2023$850M–$880M $890M–$910M Raised
Operating Cash Flow ConversionFY 202390%–110% of Adj. EBITDA 110%–115% of Adj. EBITDA Raised
Price ContributionQ4 2023 / FY 2023~Flat (stable pricing) ~Flat (neutral price) Maintained
Gross Margin TrendQ4 2023 / 1H 2024Normalization expected (100–150 bps) Additional normalization in Q4; residual into 1H24, partly offset by initiatives Maintained trajectory

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2023, Q2 2023)Current Period (Q3 2023)Trend
Pricing & Gross MarginQ1: Elevated pricing; GM outperformed; normalization expected in 2023 . Q2: Stable pricing; 100–150 bps GM normalization cadence into Q3/Q4 .Price contribution flat; GM −50 bps YoY; further normalization in Q4 with offsets from initiatives/M&A .Normalizing; execution offsets improving.
IIJA (Infrastructure funds)Slow flows; early signs in FL/AZ .“Green shoots” in Upper Midwest (MI, WI, Dakotas); anticipate more volume in 2024 .Tailwind delayed; improving into 2024.
End-Market DemandQ1: Municipal resilient; resi soft; nonres mixed with onshoring mega-projects . Q2: Pockets of softness in nonres starts (multifamily/warehousing) .Municipal stable; resi sequentially improved; nonres volumes stabilized late Q3; highways/street strong .Stabilizing; mixed by vertical.
Inventory & SourcingQ1: Record cash flow; inventory optimization started . Q2: Continued rightsizing; cash generation strong .Inventory down ~$325M YoY; sourcing optimization exceeded expectations; incentives via preferred supplier tiers .Positive margin tailwinds from sourcing and mix.
Private LabelQ2: Initiative accelerating .Long-term plan to 10%+ private label; Enviroscape supports geosynthetics content .Expanding; margin accretive.
Capital AllocationQ1/Q2: Share repurchases; leverage comfortable 1.7x; M&A pipeline robust .$770M repurchases YTD (30M shares); leverage ~1.5x; optionality for dividends .Increasing returns; balance sheet strength.
Technology/ToolsProprietary bidding, portals; productivity focus .Emphasis on quoting productivity and customer stickiness; less e-commerce-driven .Continuous enhancement.

Management Commentary

  • “Gross margin in the third quarter was 50 basis points lower than last year as inventory costs continue to catch up with the current market prices… we have confidence in our ability to offset a portion of it through underlying gains from our margin initiatives.” — CEO Steve LeClair .
  • “We delivered excellent operating cash flow in the third quarter of $373 million, reflecting over 140% conversion from adjusted EBITDA… Net debt leverage at the end of the quarter was 1.5x.” — CFO Mark Witkowski .
  • “We expect net sales to be in the range of $6.65 billion to $6.75 billion. We’re raising our expectation for adjusted EBITDA to $890–$910 million… and operating cash flow conversion to 110%–115% of adjusted EBITDA.” — CFO Mark Witkowski .
  • “The IIJA funds have certainly been slower… starting to see some green shoots… in Michigan, Wisconsin and the Dakotas.” — CEO Steve LeClair .
  • “The long-term plan… getting into this 10-plus percent in terms of private label.” — CEO Steve LeClair .

Q&A Highlights

  • Nonresidential cadence: Starts softness concentrated in multifamily/warehousing; completions remain steady via fire protection; expect nonres flattish in 2024 on the high end of range .
  • Margin path: Remaining gross margin normalization flows through Q4 and into 1H24; initiatives (private label, sourcing optimization) and accretive M&A offset part of the drag .
  • Pricing outlook: Neutral price environment assumed for 2024; category-level variation possible .
  • Capital returns: Opportunistic repurchases alongside robust M&A pipeline; dividends possible longer-term given leverage ~1.5x and strong cash generation .
  • IIJA timing: Initial projects funded in Upper Midwest; broader flow expected in 2024 .

Estimates Context

  • S&P Global consensus was unavailable via our data source at the time of this analysis; therefore, we cannot provide “vs. consensus” quantification for revenue or EPS for Q3 2023. Where estimates comparisons are required, we note explicitly that S&P Global consensus data was unavailable.

Key Takeaways for Investors

  • Near-term: Expect continued gross margin normalization in Q4 with partial offsets from sourcing, private label, and M&A; neutral pricing backdrop limits price-driven upside — trade the stock on execution versus margin normalization trajectory and cash conversion strength .
  • Cash flow and balance sheet: Strong operating cash generation and ~1.5x leverage provide dry powder for accretive M&A and buybacks; optionality for future dividends enhances total return profile .
  • Demand mix: Municipal repair/replacement steady; resi lot development improving sequentially; nonres weakness stabilizing with highways/street and mega-projects offsetting softness — monitor multifamily/warehouse exposure .
  • Structural margin levers: Private label expansion toward 10%+, sourcing optimization, pricing analytics, and scale productivity are medium-term drivers to re-expand margins post-normalization .
  • IIJA tailwind timing: Funding flow remains gradual; early activity in Upper Midwest suggests municipal tailwind strengthening in 2024 — positioning and local footprint key to capture share .
  • Guidance momentum: Raised FY2023 EBITDA and cash conversion targets signal confidence in margin resiliency; watch Q4 margin prints and any early 2024 commentary on normalization depth .
  • Capital deployment: Expect continued tuck-in acquisitions across geographies/product adjacencies (e.g., geosynthetics, HDPE fabrication); buyback participation in secondaries likely when available .

Appendix: Source Documents

  • 8-K (Item 2.02) preliminary Q3 2023 results: Net sales $1.822–$1.832B; Net income $153–$163M; Adjusted EBITDA $257–$263M; reconciliation provided .
  • Fiscal 2023 Q3 Earnings Press Release: Comprehensive GAAP and non-GAAP results and commentary .
  • Fiscal 2023 Q3 Earnings Call Transcript: Prepared remarks and Q&A (Dec 5, 2023) –.
  • Fiscal 2023 Q2 Earnings Press Release & Call (for trend): Results and narrowed guidance –.
  • Fiscal 2023 Q1 Earnings Call (for trend): Margin outperformance early in year and inventory/cash flow setup –.